Grid Trading Strategy Explained and Simplified

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According to Investopedia the world’s largest financial encyclopedia, Grid trading can be defined as “a foreign exchange trading technique that seeks to capitalize on normal price volatility in currency markets by placing buy and sell orders at certain regular intervals above and below a predefined base price. Such buy and sell orders, generally spaced at 10- or 15-pip intervals, create a trading grid”

If you manage to accurately implement the Grid trading strategy, it can yield substantial profits. This strategy is more for the advanced trader who has a firm grasp and understanding of how the Forex markets really work. Going forward you’re going to learn what the Grid trading strategy is all about and more important, you’ll learn how to properly implement the strategy.

What is Grid Trading Strategy?

Firstly the Grid System requires establishing a grid size that you’re going to be using for your trading and for our Grid base trading strategy we’re going to use 50 pips as the grid size, so the gaps between the grid lines are going to be 50 pips. Once you’ve established that you’re going to be ready to buy and sell the same currency at the same time.

The Grid Trading Strategy doesn’t take a directional bias and as such we don’t care about the market direction. Since we don’t know what direction the market is going to move we’re going to buy and sell at the same time the same currency. Once the market starts moving in our direction and hits the next 50 pips grid line you’re going to take profit on the positive transaction and you just leave the transaction that’s negative and afterwards, you’re going to simultaneously buy and sell again at that level. This process is repeated until all the transactions that you have entered are in positive or reach the grid line.

Grid Trading Strategy in action on EURUSD Forex Pair

Unlike every other strategy, the Grid Trading Strategy uses NO Stops and that is because we’re always hedging our trades by simultaneously buying and selling. Because of the size of the grid, you’re not going to execute trades each and every day, however, if you choose a different grid size which is more suitable for intraday trading you’ll be more active. The Grid trading strategy doesn’t really require you the use of charts and it can be easily automated into an expert advisor quite easily.

The only major negative aspect of Grid trading is that in a strong trading market, you can incur very large drawdowns, however, when we have ranging conditions the Grid trading system performs very well and since the Forex market spends 75% in consolidation it’s very much more suitable for the currency market. You also need a solid risk management system put in place and last but not least it requires a shift in your mindset as this is not your typical everyday strategy.

In order to understand better the pros and cons of the Grid trading system, we’re going to look at two big examples, one when the market is trading and the other one when we have established a range.

Grid Trading Strategy in a Ranging Market

There is nothing set in stone when it comes to the grid size as it depends on how many trades you really want to open and secondly, it must be a function of each individual currency’s average true range and volatility. For the purpose of this example, we’re going to use a 50 pips grid size and the EUR/USD 1.0850 level as our base grid line. We’re starting off by simultaneously buying and selling at 1.0850.

Grid Trading Strategy in Ranging Markets

Once the market hits our next grid line at 1.0900 we’re going to simultaneously buy and sell again. We’re going to buy and sell the same amount as we did when we started the process. We’re also going to take profits from our Buy 1 order and carry on the Sell 1 order (see Figure 2). Your position now will be as follows:

Buy 1 = +50 pips booked;

Sell 1 = -50 pips open position;

Buy 2 = New open position;

Sell 2= New open position;

Scaling into Positions with Grid Trading Strategy

The market moves back to our initial base grid line (see Figure 3) and again we’re going to simultaneously buy and sell after taking profits from Sell2 order and also closing at BE the Sell1 order. The position showing us a loss will be carried on. Your position now will be as follows:

Buy 1 = +50 pips booked;

Sell 1 = closed at BE;

Buy 2 = -50 pips open position;

Sell 2 = +50 pips booked;

Buy 3 = New open position;

Sell 3 = New open position;

Grid Trading Strategy – 3rd Level of Buying and Selling

The market is reaching again our second level in the grid system (see Figure 5)and we repeat the process of buying and selling again. More, we can close Buy 2 order at BE and also take +50 pips profit on our Buy 3 order and leave the Sell 3 order still open. Your position now will be as follows:

Buy 1 = +50 pips booked;

Sell 1 = closed at BE;

Buy 2 = closed at BE;

Sell 2 = +50 pips booked;

Buy 3 = +50 pips booked;

Sell 3 = -50 pips open position;

Buy 4 = New open position;

Sell 4 = New open position;

At this point, we have +150 pips booked in profits and -50 pips in open position plus two newly open positions and if we were to liquidate our entire market exposure we would have ended up with +100 pips in profit. The same process can be repeated over and over again until all the positions are in profit.

Grid Trading Strategy – 4th Level of Buying and Selling

Grid Trading Strategy in a Trending Market

In order to really understand the power of the Grid trading strategy as well as the drawbacks, we have to look at one example and see how the Grid Trading Strategy performs when we have a strong trend put in motion. If the trend develops in a strong fashion way with shallow retracements the cumulative losses from all open positions will move exponentially higher as the trend expands (see Figure 6).

Grid Trading Strategy on USDJPY Forex Pair

In the above figure, we can clearly see that even though after reaching the 6th level of buying and selling in our Grid System we only managed to cash in +300 pips while the cumulative open positions show us a net loss of -850 pips.

Using the Grid Trading Strategy for Consistent Growth

The Grid trading strategy can be a profitable system if we have the right trading environment, however, if we have a strong trend, it can hurt your account balance as the above example clearly shows. The Grid trading strategy is not for everyone as firstly you really need a deep understanding of the market flow and has a solid risk management put in place otherwise the chances to blow your account increase considerably.

We have created a powerful strategy based on Grid Trading Strategy and Scalping, and it’s working really well for us in our trading. We called it the EURUSD Super Scalper EA and it’s something we are really proud to show you. Be sure to check it out!

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